Value investing strategies come in many styles. However, the two styles that stand out the most act like bookends to the value philosophy.
Ben Graham pioneered the search for statistically cheap stocks. He originally looked for stocks selling far below liquidation value. That strategy worked throughout the depths of the Great Depression and well into the 1940s and ’50s. It fell out of favor during the Go-Go ’60s, back into favor with the 1973-74 crash, and bounced in and out (mostly out) of favor ever since.
Some of Graham’s more ardent followers used his strategy outside the U.S. with much success. Others adapted as the market caught on and the classic Graham bargains disappeared. They looked for hidden assets, low price-to-book, etc. They redefined what a statistical bargain looked like.
Overall, Graham’s strategy was built around estimating asset values, which change significantly less than stock prices. An investor, willing to dig through balance sheets, estimate assets conservatively, and with a little bit of patience, could earn a good return without much risk if they bought a stock cheap enough.
At the other end of the spectrum was Phil Fisher. Fisher learned that he got better returns out of the stocks of growing companies that he bought and held for several years compared to those that he bought at a low price, sold at a high price, and repeated.
The price he paid still mattered, of course, but his strategy required looking beyond what could be easily measured. Future growth in revenues, cash flows, and eventually earnings were important but superior management, corporate culture, and a competitive advantage were even more so. An investor with an advanced level of judgment, looking for companies with exceptional growth prospects, bought at a reasonable price, could earn a good return for decades if that growth is realized.
If you study the great value investors, you’ll find that they often fall somewhere in between. They borrow a little from Graham and a bit from Fisher and make it their own.
And yet, the value philosophy remains constant throughout each: Buying something for less than it’s worth, buying an ownership stake in a business not pieces of paper, and buying with a margin of safety built-in.
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“The concept of buying securities at less than their indicated value includes what I have always regarded as the most dependable assurance of success in every form of investment — whether it be bonds or stocks — and that is the concept of margin of safety… When you have such a margin on a common stock purchase, then if things do not work out as well as you expect them you still have a cushion to absorb this disappointment. You can end up, if not with a profit, at least with no loss.” — Ben Graham (source)
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“A successful investment program can be built on buying stocks at low prices in relation to current earnings provided such companies have prospects for increasing earnings in the future.” — John Templeton (source)
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“I realize that many things determine if a stock is a wise buy. But I have learned that during a depressed stock market, if you can get a cost position in a stock’s bottom price range it will forgive a multitude of misjudgments later.” — John Train (source)
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“For most investors in general, selling the expensive asset, and buying the cheap asset, seems like a logical strategy – except when you actually try to do it. Because most people are actually not wired to be selling what’s expensive and going up, and buying what’s cheap and going down.” — Bill Miller (source)
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“If you’re buying something, wouldn’t you rather pay less for it than more? When stocks get cheaper, how can that not be good news for a long-term investor? There are very few times when you should be bold, and history shows that those times are precisely when it seems you should be most afraid. It’s absolutely cockamamie crazy to sell stocks after they drop. Instead, you should say, ‘Today there’s a first-rate bargain and I’m buying.'” — Charles Ellis (source)
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“The thing about buying depressed stocks is that you really have three strings to your bow: 1) earnings will improve and the stocks will go up; 2) someone will come in and buy control of the company; or 3) the company will start buying its own stock and ask for tenders.” — Walter Schloss (source)
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“There is no great secret in fortune making. All you have to do is to buy cheap and sell dear, act with thrift and shrewdness and then be persistent.” — Hetty Green (source)
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“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.” — Warren Buffett (source)
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“We have changed with the markets. For example, we’re buying securities for liquidation value. Bonds in Chapter 11. Although they won’t fit into a pure Graham formula, they meet certain of the essential standards. Remember, the idea was to buy a dollar for 50 cents. So, if you can buy it for 20 cents, so much the better.” — Peter Cundill (source)
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“Even the world’s greatest business is not a good investment if the price is too high.” — Lou Simpson (source)
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“Price does matter. You increase your profit potential immensely if you buy low. If I buy at 32 and the stock goes to 75, I make a good profit. But if I buy at 20 and it goes to 75, I make a much higher return. Even a great company can be priced too high if there’s a lot of glamour attached to it. In that sense, temporary bad news about a good company may create a buying opportunity. It’s my job to find unusual companies and then judge whether the price they’re selling at is too high.” — Philip Fisher (source)
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“It’s simple: If you have a valuation discipline, then you know that stock prices change more rapidly than business value. You also know that rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return.” — Bill Miller (source)
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“What I favored is searching for the shares that are most thoroughly depressed. When people are desperately trying to sell, I buy. When people are desperately trying to buy, I sell. It has worked out very well over the years.” — John Templeton (source)
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“Value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock and that approach will never go out of style. Some people think that value investing is you chase companies which have a lot of cash and they’re in a lousy business or something. But I don’t define that as value investing. I think all good investing is value investing, and it’s just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than he pays for.” — Charlie Munger (source)
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“We want to get more earnings for the price we’re paying.” — Joel Greenblatt (source)
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“I have a puritanic vision of the true investor as someone who is entirely disinterested in what the stock market does except on two sorts of occasions that meet his convenience. The first occasion is when the market obligingly permits him to buy a group of common stocks at less than their indicated value; the second is when with usual courtesy it permits him to sell at not more than one-half their former high quotation those that are of no importance to him.” — Ben Graham (source)
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“Investors must never mistake an investment that is down in price for one that is bargain-priced; undervaluation is determined only by a security’s price compared to its underlying value.” — Seth Klarman (source)
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“Smart investing doesn’t consist of buying good assets, but of buying assets well. This is a very, very important distinction that very, very few people understand. Price is what matters for investment success. Only disciplined objective unemotional experts can know when the price is right.” — Howard Marks (source)
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“We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we’re operating in. But we start with valuation — that’s always number one.” — Bill Miller (source)
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“You’re not buying a stock, you’re buying part ownership in a business. You will do well if the business does well. And if you didn’t pay a totally silly price.” — Warren Buffett (source)
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“There is only one way you can make money in the investment business — and that is the way you buy all your other things except stocks. You buy ’em cheap. You buy ’em at a discount. It’s like my mother used to say: ‘Arnold — you gotta buy it wholesale.'” — Arnold Van Den Berg (source)
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“I never in all my life bought a stock because I liked it. I bought it because it was a cheaper bargain than any similar stock I would buy anywhere in the rest of the world. See the investment world as an ocean and buy where you get the most value for your money.” — John Templeton (source)
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“Don’t buy ‘cheap’ stocks just because they’re cheap. Buy them because the fundamentals are improving.” — Peter Lynch (source)
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“We have tried to emphasize as much as possible the obtaining of specific insurance against adverse developments by trying to buy securities that are not only not too high but that, on the basis of analysis, appear to be very much too low. If you do that, you always have the right to say to yourself that you are out of the security market, and you are an owner of part of a company on attractive terms. It is a great advantage to be able to put yourself in that psychological frame of mind when the market is not going the way you would like.” — Ben Graham (source)
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“I learned how to work on what’s cheap. I became a total believer. To this day I think that is the only way to invest.” — Michael Price (source)
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“What is Value Investing? Charles Munger, CEO of Wesco, liked to compare the value investing model to the pari-mutuel system at the race track. Anybody can figure out which horse has the most chances of winning using its track record, its weight and so on. But horse fundamentals are priced within odds: Usually, the good horse pays only 3 to 2 as a bad horse would pay 100 to 1. But if you could find a horse that has an even chance of winning that pays 3 to 1 you would have found a mispriced bet. So that is what value investing seems to be all about: Finding mispriced securities. But, like at the horse track, opportunities are not common and are the exception rather than the rules.” — Francois Rochon (source)
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“I have a very simple strategy. I buy good companies at attractive prices. Then I sit on them.” — Philip Carret (source)
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“Superior investing is taking advantage of the errors of others. In order to get an above-average return in the long run, you have to buy things for less than they’re worth, which is to say that the other people out there have to be selling that thing for less than its worth. They’re making a mistake and you need to act in a contrarian way to take advantage of that.” — Howard Marks (source)
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“Our approach can be summarized with the phrase ‘lowest average cost wins.’ For most investors if a stock starts behaving in a way that is different from what they think it ought to be doing — say, it falls 15 percent — they will probably sell. In our case, when a stock drops and we believe in the fundamentals, the case for future returns goes up.” — Bill Miller (source)
Related Reading:
More Quotes on Value Investing
Wise Words on Investor Behavior